June 25, 2021

Strongly Worded CEO Letters: What If You Have To Disclose Your Follow-Through?

I blogged 3 years ago that it was getting difficult for CEOs to stay silent on hot social and political issues. Fast forward to today, and open letters have taken off as a mainstay of corporate political activism. Research suggests that they’re viewed as a somewhat “safe” way to respond to consumer & employee expectations without sacrificing shareholder value. But signs are emerging that investors and other stakeholders are starting to pay closer attention to follow-through.

Last year in particular, hundreds of companies vowed to combat systemic racism against Black Americans in the wake of George Floyd’s murder. It’s difficult to keep track of which companies made a commitment, what the commitment was, and whether they’ve followed through. Various “pledge trackers” sprung up in the fall, but they haven’t been maintained with real-time data.

One economist says that in the aggregate, companies pledged to put somewhere between $50 – 65 billion toward DEI efforts over a multi-year time frame. Now, he’s submitted an SEC rulemaking petition to urge that companies be required to disclose progress on their commitments. So far, he says, only $500 million has been spent. He argues it doesn’t matter whether investors care about this info, because compelling disclosure would be in the public interest and is within the Commission’s authority. That’s a bold position to take, in light of recent Commissioner statements about the SEC’s role and materiality.

Some investors do seem to care about racial equity commitments, though. We’ve been blogging throughout this proxy season about shareholder proposals requesting EEO-1 reports and racial equity audits. These proposals have become more common this year – and have been getting solid support. Shareholders seem to be moving from requesting simple demographics data to requesting data that allows them to understand & evaluate company efforts to promote equity. The level of support for these proposals, while typically below a majority at this point, implies that a sizable portion are starting to view the info as relevant.

The Commission hasn’t given any indication that it would take up this rulemaking petition, but the letter raises awareness of what could be an emerging disclosure risk. This DealBook column predicts that “strongly worded letters” are only going to become more common. With reputational risks & investor materiality assessments constantly evolving – and expectations that “ESG”-type commitments will be accurate – securities & corporate governance counsel should have a seat at the table when companies are crafting these high-minded statements. You want to ensure anything that’s released aligns with the company’s stated values and what it is actually doing & planning to do.

You may also want to start tracking your company’s follow-through, if you’re not doing that already – see this PracticalESG blog for ways to do that – and be prepared for inquiries like this one from Majority Action.

Liz Dunshee